The Federal Reserve is widely expected to keep interest rates unchanged at the conclusion of its July 28-29 policy meeting. Yet, traders are still pricing in a 38% chance of a interest-rate hike as of Friday, up from 12.8% a week ago, based on the CME FedWatch tool.
The disconnect may be the new normal under Fed Chairman Kevin Warsh, who has disavowed forward guidance, or public commentary on the Fed’s economic and interest-rate outlook. Investors could pay the price in increased uncertainty and more market volatility for both stocks and bonds.
The case for keeping the federal-funds rate at its current target range of 3.50%-3.75% looks compelling. Employment conditions are decent, the economy is healthy, and the latest inflation reports showed a deceleration in price growth, notwithstanding higher oil prices. These trends collectively argue for the Fed to stay on hold, even though inflation has been running above the central bank’s 2% annual target for the past five years.